Theo was too right…

keep-calm-let-s-cut-the-cake-and-eat-it

Here’s an unpalatable truth: when Fonterra head Theo Spierings said the milk price was unsustainable back in August last year, he was right. He also said the way milk prices are set needs to change. Correct again. Then he started talking about the need for, “a good debate with farmers … about how are we going to share – how are we going to cut the cake.”.  That’s what really matters right now.

At the time, Fonterra Australia head, Judith Swales responded to Milk Maid Marian’s request to clarify what Theo had meant by “sharing the cake” and said:

“We have always said that the best dairy industry model is the one where everyone can get a sustainable return. Farmers need to be able to make money, processors need to make money and so do customers, like retailers. And that’s what he means by sharing the cake.”

It’s hard to disagree with that sentiment. The problem is that we’ve learnt one more lesson in the last couple of months: if you’re stranded on a desert island with a hungry gorilla and a small cake, you’re in very big trouble indeed.

This post is not intended as an attack on Fonterra. After all, things are no better at Murray Goulburn. The reality is when there are thousands of small businesses selling a highly perishable product to a handful of large corporates and multinationals, the playing field is anything but even.

Just 12 months before Theo was talking about cake, the majority owner of Warrnambool Cheese and Butter, Lino Saputo, was quoted as wondering:

“…what will it take for the dairy farmers to be optimistic about the dairy industry and investing in their farms and what kinds of programs can we put in place that will assist them.”

At the time, I summarised my answer as “reliable profitability”. I posted the charts below showing just how far dairy farmers’ terms of trade had slipped and the wild fluctuations in profitability.

DairyTermsTrade

DairyBusinessProfit

“Productivity in the Australian Dairy Sector”, ABARES, September 2014

There’s one more factor I missed: confidence.

Writing for the latest edition of The Australian Dairyfarmer magazine, Dairy Australia managing director Ian Halliday notes that :

“In 2015, confidence among dairy farmers was at 75 per cent. In February this year, confidence had fallen to 65 per cent reflecting the dry seasonal conditions and also what milk prices were looking like for 2016-17 when considering the global price outlook.”

“Following the sudden milk price cuts in late April, which affected up to 65 per cent of all dairy farmers, we conducted another survey to get an understanding of changes in farmer confidence. This sample, although smaller, indicated confidence nationally had droppedd to 45 per cent.”

I’m willing to bet that confidence has fallen to historic lows after the Murray Goulburn opening price announcement.

What’s needed now is:

  • Transparency
  • Risk management strategies to deal with volatility
  • A more level playing field that provides farmers with real choices when dealing with processors.

These are the ingredients of reliable profitability and, without it, we’ll be continually wrestling the gorillas for the crumbs of a perpetually shrinking cake.

Never say die

When analysts talk about softening milk supply, there’s a whole other layer that’s anything but soft. It’s uncomfortable chats in the dairy about next week’s roster, sleepless nights worrying about where the next load of hay is going to come from, and long, long hours.

He spends more time in the tractor, she spends more time off-farm to pay the bills. The office is a mess, the kids watch a little more TV than usual and the mummy guilt rises with it. They all get snappy.

He comes in from the chilly night air long after the children have gone to bed. She’s in the office doing the books. Farms are not selling. There is no light at the end of the tunnel and there’s no way out, either.

Then one afternoon, the farm consultant brings a welcome dose of encouragement: the place is in great shape, poised to take advantage of any recovery, and the gossip around the traps is that an upbeat announcement from the co-op is imminent.

That night, as she takes her little boy out to check on the maternity paddock, the farmer is drawn by a ruckus at the dam. A moorhen hangs about a metre above the water, caught by one leg in a twist of wire and flapping its glossy blue-black wings desperately even though there’s clearly no hope of escape.

The farmer cannot stand and watch any more than she can walk away. With toddler on her shoulders and Blundstones squelching through the shallows, she wades towards the struggling bird. There is blood on the wire but with a deft spinning wrench, the fence springs back to shape, releasing the bird which, to the farmer’s astonishment, paddles away seemingly unhurt.

In the morning, the most anticipated email of the year arrives. To the farmer’s astonishment, the milk price will open 24 per cent higher than last year and the co-op has a little rescue package in the shape of a pre-payment for those prepared to pledge their loyalty. She reads the email twice more, just to be sure.

Never say die.